Daily Newsletter, Wednesday, 11/07/2007

Table of Contents

Market Wrap

Chinese Finger-lock

by Keene H. Little

I may be giving away my age (54) with this but do you remember those 5 and
dime stores where you could buy little trinkets? One I remember was the Chinese
finger-lock and it was a little tube made out of reeds and the diameter would
expand when pushed and contract when pulled. So when you put a finger from each
hand into one of these things you couldn't pull your fingers out. You were
stuck. Could the Chinese have us in a market version of this thing?

We want China to allow their currency to float. But if they do that then their
holdings of US dollars drops further in value. Since they hold well in excess of
$1T in US assets they are naturally uncomfortable in allowing their holdings to
drop in value. We've been pressuring them (as have most other countries who
trade with China) to allow the yuan to float higher so that we can be more
competitive in selling them product and help reduce the huge trade imbalance
with them. It's even
got our economically illiterate Congress looking to go
protectionist on us (they need to study how well that worked for us in the Great
Depression).

So last night the news out of China spooked holders of the US dollar (are there
any left?) and it dropped hard. This in turn spiked commodities like oil and
gold to new highs. Just as a side note, if you'll remember I had discussed not
long ago the contrarian use of magazine cover stories (by the time a market move
makes the cover a general publication magazine, such as Times, US News & World
Report, or Barron's, the trend is likely near its end). Now comes news of a
different
cover story--I'll call it the Cover Girl signal. She's probably not a
Cover Girl but she is a super model--Brazilian Gisele Bundchen--and she has
decided that she would prefer to have her millions paid to her in anything but
US dollars.

Now Gisele, who is a Brazilianaire, has done very well with her assets and is
very likely a very intelligent woman but I'd have to question her ability to
make predictions about the currency market. Therefore all the news about her not
wanting the US dollar is very likely another indication of how oversold and
unloved the US dollar is. It's time to be looking for a bottom in our beaten
down greenback.

Back to the Chinese and their desire to diversify their holdings in something
other than the US dollar. Last night Cheng Siwei, vice chairman of the Standing
Committee of the National People's Congress, said Beijing authorities should
consider other appreciating currencies, such as the euro, instead of the
depreciating US dollar when the country purchases foreign bonds. That sent the
US dollar tumbling lower and gold and oil higher. With $1.43T in
foreign-exchange reserves it sends
shivers throughout other countries when they
think their own holdings in US dollars could get creamed even further if the
Chinese start unloading US assets.

There was then some back-peddling and explanations from the Chinese that
supported a dollar bounce from its overnight low and the metals (gold and
silver) reversed much if not most of their overnight gains. Unfortunately for
our equities the selling continued for most of the day. I have to wonder what
the Chinese are doing when they keep sending this economist (who doesn't speak
for the government) to float trial balloons to see what the reaction will be to
talk of diversifying their
holdings away from the US dollar. They keep firing
those missiles across our bow to make sure we're paying attention to them. It's
not nice being held over a barrel (and not oil this time) as we are.

And speaking of oil, it made another all-time high last night, edging closer to
the $100 mark. It posted a high of 98.61, nearly $2 above Tuesday's closing
price, it ended down on the day a few pennies at $96.45, and that was after
reversing off a low $94.62. Oil traders are getting whipped more than equity
traders these days and there's some big money in those daily swings.

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Even though China began to downplay the idea that they were thinking of
diversifying (having made their point to all the countries trying to force them
to let their yuan float higher more quickly) General Motors came in and stank up
the place with a $39B bomb--they reported that their profitable string of
quarters were not going to be so profitable after all. They're going back three
years to restate earnings to adjust for unused tax credits. Their stock gapped
down from yesterday's
$36.18 close and finished at 33.96 today, down -6.1%.

One look at the numbers in the table above (I can't get reliable volume data on
the NYSE today) shows how lopsided the day's selling was. Decliners were all
over advancers 5:1 and new 52-week lows were almost 3:1 over new highs. Even on
recent rally days the new 52-week lows were beating out new highs so it became
obvious that there was an effort to raise the indices while unloading inventory.
It pays to look at what's going on under the hood instead of just admiring how
well the major
indices are doing (same is true in reverse when the market has
sold off).

Economic reports
Not much attention was paid to the economic reports today since there were other
factors depressing the market. But we had the preliminary report on
productivity, wholesale inventories, crude inventories and consumer credit.

Productivity--Prel
Productivity in the nonfarm businesses increased at an annual rate of +4.9% in
the third quarter, the fastest growth in four years. Unit labor costs dropped at
an annual rate of -0.2% and this combination is good news for the Fed since
these numbers help in the wage inflation area.

Wholesale Inventories
There was good news in this department as well with sales outpacing inventories
which dropped the inventory-to-sales ratio to a record low 1.10 from 1.11 in
August and down from 1.15 a year ago. Either businesses are playing it very
close to the vest in case we head into a recession (smart) or else just-in-time
inventory control is working very well. The only caveat is that most of the
sales increase came from a +7.7% increase in petroleum sales because of the
higher prices.

Crude Inventories
Crude inventories dropped again the past week, down -800K barrels to 311.9M,
making it three weeks in a row that inventory levels have dropped. However this
was less of a drop than the -1.6M barrels that many had been expecting.

Crude hit a high of $98.61 in overnight trading, up nearly $2 from Tuesday's
close (probably more a result of the US dollar getting blasted lower again) but
then it gave up its gains, and then some, before bouncing into the close and
finishing down only 16 cents. It was a pretty wild day in most commodities as
many struggle to make sense with what's happening in the US dollar (e.g., did it
find a bottom on the Chinese news?).

Consumer Credit
Consumers are still spending but they're finally slowing down. Maxing out those
credit cards is starting to take its toll. Credit (credit card and non-revolving
debt for things like autos) rose at an annual rate of +1.8% in September.
Outstanding consumer debt now stands at $2.48T. Credit cards are still getting
used a lot though--up +4.4% vs +9.3% in August while non-revolving credit rose
by only +0.3% vs. +6.4%.

As I've mentioned before, with the home equity withdrawals screeching to a stop,
consumers have resorted to their credit card as the consumer loan of last
resort. That will be the next credit crunch. Capital One report losses of nearly
$5B as they write off several hundred million dollars more in 2008 than they had
previously reported. They see a worsening in loan delinquencies and the trouble
in the housing market is expected to exacerbate their problem.

Capital One (COF) was down -$9.23 to $50.11 today for a -15.5% haircut. Their
stock is now trading back down to mid-2003 levels. In fact it traded at this
level in 1999. This is a common theme for many of the banks--prices are where
they were 8-10 years ago so buy-and-holders haven't exactly done too well,
especially when you consider inflation which has been a lot worse than reported
when you consider the value of the dollar.

The major investment banks continue to be the albatross around the market's neck
these days. Every time someone comes out and calls a bottom for the banks and
that the worst news has been reported, another bank comes out and says well,
maybe we have just a little more bad news to report. It reminds me of the
multiple bottom calls for the housing market. In fact I came across a good
cartoon about the housing market "hopes" for a bottom:

Dreamhouse cartoon, courtesy Slate.com

A bear market is called the slippery slope of hope as those who own stock keep
on hoping the market will find a bottom. The housing market is in a bear market
and it's being aggravated now by the inability for many buyers to get loans for
the dream home. Leave it to a cartoonist to capture the mood in this cartoon.

Back to the banks though, they continue to disappoint with additional reports of
investments gone bad. Most of you understand that this problem has a long ways
to go before it's cleansed from the system and it will be a while before all of
the "mark-to-model" holdings are "marked-to-market". Each time there's another
downgrade or regulators force banks to report accurately what's on their books
there will be another report of more write-downs. After today's close
Morgan
Stanley came out with another report stating that they will be writing down an
additional $3.7B to account for reduced value in their subprime portfolio.

By the way, this is not just a subprime mortgage problem. Convenant-lite loans
to businesses will be the next wave of write-offs, and then consumer credit card
debt. It's why I've been saying for a long time now that the collapse of the
credit bubble will be mind-numbingly swift, and painful. I came across one
report showing the exposure to mortgage-backed securities and the potential
trouble they're in:

Level3 assets within the major investment banks, courtesy portfolio.com

Level3 assets are considered the subprime slime and other risky loan portfolios
(those tranches that were parceled out to investors that are now being
downgraded). As you can see in the table, these Level3 assets are a significant
portion of the banks' equity. Goldman Sachs (who has been suspiciously quiet)
and Morgan Stanley appear to have the most exposure. Of course GS has mastered
the technique of shorting whatever they sell you so they may have limited their
exposure in that way.
The banks are a long way from writing this stuff down and
their only hope (including the Treasury's plan with their Super SIV fund idea)
is to simply prolong how long it takes to write it down. The market may not be
as accommodating as they would like in this regard.

So today was bear-ugly (or I suppose bear-beautiful if you were short the
market). Let's see what the charts are telling us from here. Starting with the
VIX, since it was giving us a good heads up about the vulnerability in the
market, it's definitely on a "buy" signal (which is bearish for stocks):

Volatility index (VIX), Daily chart

When the VIX came back down for another test of its 200-dma with the very clear
bullish divergence on MACD, it was a buy signal. Now watch to see if it drops
back down and breaks the uptrend line on MACD (and/or RSI) as a heads up that
the market could get a bigger bounce.

DOW chart, Daily

Potential support for the DOW is very close now. The 200-dma and uptrend line
from July 2006 are on top of each other at 13208. Nice round number support at
13200 could help. As I show on its 60-min chart there are a couple of Fibs
pointing to the possibility the DOW will drop to the 13150-13175 area before
bouncing (if it does). I show a couple of possibilities to watch for. The most
obvious is a bigger bounce off some pretty solid support. Whether that bounce
turns into just another
correction and heads lower (dark red) or starts another
rally leg can't be known from here.

The new rally leg idea (green) is based on a large rising wedge pattern that
could be playing out from the August low. This pattern would be full of chop and
big whipsaws as the market works its way higher into the beginning of next year.
Another rally may not be logical in light of what we're facing but since when
has that stopped a rally. So I do not discount that possibility. It takes a
break above 13962 to suggest the bullish possibility is playing out. If 13150
does not act as
support (assuming it drops to that level) then the next downside
target is near 12800.

DOW chart, 60-min

The bottom of a parallel down-channel for price action since the October high
matches up with two equal legs down from that high, at 13175. In the move down
from October 31st two equal legs down is at 13151. So this looks like it has
potential to be support, and keep an eye on the rising trend line on the RSI
chart since support there could see another bullish divergence. But a drop below
those levels, and out the bottom of the parallel channel, would be bearish and
I'd be looking
for at least another 300 points lower before finding support.

SPX chart, Daily

SPX is closer to potential support at the bottom of its down-channel and Fib
projection for two equal legs down from the October high, at 1467. Similar to
what I said for the DOW, it's possible we're going to see this market turn right
around and start heading higher again, building a rising wedge into the
beginning of the year (which would have SPX likely topping out just above 1600).
A bounce off the 1467 (or slightly lower as shown in the 60-min chart below)
could lead to a correction
that takes it back up to the top of its channel
before spilling to the downside again. If SPX gets below 1460 then the next Fib
support level I see is near 1414 would could coincide with the uptrend line from
August 2004.

SPX chart, 60-min

In the move down from October 31st two equal legs is near 1461 so the 1461-1467
area holds potential for support to this decline. Also like the DOW, watch to
see if the rising trend line on RSI holds. If price looks like it will hold this
area, with bullish divergence, I'd buy this dip and see where it takes us. We
should get a rally that lasts for at least a few days (could be very choppy with
lots of whipsaws). But if that support doesnt hold, look for another 35-45
points lower
(depending on whether the DOW finds support sooner or not).

Nasdaq-100 (NDX) chart, Daily

The techs have been leading the charge to the upside and for that reason it's
critical what they do here. The bearish thing today is the break of its uptrend
line from August. It's the last index to have done this and it did it with gusto
today. The bearish divergences I've been showing since early October were a dead
giveaway that this was coming (the hard part is knowing when but it was telling
longs to take their profits and run). I show one minor bullish possibility
(pink) with
a push back up to one last high as part of a larger rising wedge
pattern. One of the EW (Elliott Wave) patterns points to that possibility and I
could see it happening if the DOW and SPX catch a bounce as I showed on their
charts.

But I think the greater likelihood at this point is for a continuation lower.
Maybe a bounce back up to retest its broken uptrend line but I'm not so sure
about even that possibility.

Nasdaq-100 (NDX) chart, 60-min

The bullish (green) wave count is the one calling for one last high (which could
coincide with a retest of its broken uptrend line) but it would have to start
without much more downside here. A break below 2141 would negate the bullish
wave count.

Russell-2000 (RUT) chart, Daily

In a similar move down from the October high, two equal legs down is at 767 and
coincides with its uptrend line from August 2004, where it found support for its
August low. If that level can't hold then the next downside target would be the
August lows around 740 or possibly the Fib projection near 728.

Russell-2000 (RUT) chart, 60-min

In the move down from October 31st two equal legs down is at 756, lower than the
bottom of its parallel down-channel and the 767 target shown on the daily chart.
The RUT has a habit of overshooting targets so it's quite possible it could drop
to the 756 area before bouncing, or not.

BIX banking index, Daily chart

The banks have been in a decline long before the broader market topped out,
which is typical and why I say follow the money--they usually find a bottom
first also. The wave pattern shows a clean 5-wave move down from September and
as such looks ready for a bounce. The wave count could easily "extend" and we
could actually be in the 3rd of a 3rd instead of the 5th wave as I've shown. But
I wouldn't expect to see some bullish divergences creeping onto the charts as
they are
if that were the case. So I expect to see a bounce and today's low
tagged a Fib projection for the 5th wave that may in fact have been it. If so,
they bounce tomorrow.

Just because the banks could bounce doesn't mean the broader market will. The
banks are much more oversold than the general market. But it would be a heads up
to bears to not get complacent. But first let's see if the banks bounce in which
case they could make it back up for a retest of the broken uptrend line from
October 2002.

To keep this index in perspective, here's its weekly chart:

BIX banking index, Weekly chart

It's obviously been a sharp decline from the February high and most especially
from the September high. I've drawn a horizontal line across from October 1997
to show how well "buy-and-holders" have done in this market. By many measures
our stock market has been in a bear market since 1998. If a normal secular
market cycle lasts approximately 18 years that makes it 2016 before this one
will be over. Do you really want to hold on for the long term?

Unfortunately most small investors have been convinced of the buy-and-hold
mentality and it won't be until the end of this bear market that most will be
convinced they want nothing to do with the stock market (and for baby boomers it
will be too late). Does it make me a pessimist to say this? Call me what you
will. I prefer to think of myself as a realist and one who tries to listen to
what the market is telling me.

U.S. Home Construction Index chart, DJUSHB, Daily

I'm starting to get mixed messages from the daily chart on the home builders.
The rising trend line of MACD and RSI looks bullish. But if price continues to
work off its oversold conditions by chopping sideways then it will be bearish. I
show the possibility for one more bounce up in a triangle consolidation pattern.
From there it should drop lower and the early 2001 low coincides with a Fib
target near 215.

Oil chart, December contract (CL07Z), Daily

We have liftoff! I drew in the rising uptrend lines to show the rise has gone
parabolic. But notice the alternating red and white candles--the choppy rise at
the high here is typically an ending pattern. RSI is showing bearish divergence
at recent highs. Look for a break of each uptrend line, and maybe a retest, as
confirmation the top is in. Is oil the next bubble waiting to be popped? Stay
tuned since this rally could see a rapid retracement back to the $80 level.

Oil Index chart, Daily

Just as oil has been chopping its way higher so too has the index. This gives it
a rising wedge appearance (which might get one more push higher to finish it)
and the bearish divergence on the oscillators backs up the likelihood that we're
close to a top in this index (if today's wasn't it).

Transportation Index chart, TRAN, Daily

The price pattern for the Trannies has been ugly--very choppy up and down and it
has left me guessing which way it was going to go. Today's kiss goodbye against
both its short term uptrend and long term uptrend lines gives it a bearish look
here. Because of the choppy price pattern I don't discount the possibility for
another bounce back up but it's now looking like the decline will continue from
here.

U.S. Dollar chart, Daily

What's that song? Nobody loves me, everybody hates me, guess I'll go eat
worms... First Greenspan disses the dollar and now indignation of all
indignations, super model Gisele Bundchen has done the dollar dirty by refusing
to be paid in it. That's the last time I watch her walk down the runway in
skimpy lingerie. Well, maybe one more time.

The dollar found support at the bottom of a parallel down-channel for price
action since the August high. The bullish divergences continue on all time
frames and the Chinese news item might have caused the final low for the dollar
to get put in (often a news item finishes off a move). But the bottom of a
larger parallel down-channel from 2006, currently near 74.50 where the bottom of
the steeper channel intersects it, could be the ultimate downside target. It
takes a break of the downtrend
line near 77 to declare a bottom is in. The
coming rally in the dollar should be large and multi-month.

I'm surprised Gisele didn't say she wants to be paid in gold bullion. I guess it
might stress the straps of her Gucci bag. Starting with the weekly view I'm
showing gold hit a potentially important Fib level in overnight trading:

Gold chart, December contract (GC07Z), Weekly

The move up from October 2006 is an A-B-C move (the triangle b-wave adds
confidence in this count since that pattern does not appear in 2nd wave
positions, plus the 3-wave move up from October was only a 3-wave move and
therefore is wave-A and not wave-1). I had thought 771.40 was going to be the
limit of the rally since that's where the move up had equality between waves A
and C. Price was even stalling at that level at the time. But that call to short
gold didn't last very long when
it blasted higher again.

Now wave-C = 162% of wave-A at 845.37 which was tagged in overnight trading
(843.70 in regular trading hours as its first trade) and is the next level where
a top would be expected. Stepping in front of this rally has been an invitation
to get cut and sliced by all those rising knives so I'm a bit reluctant to call
out a short on gold here. But this is the level to try it again (or take profits
on trades, which are different than long term investments). More conservatively,
wait for
a break of its steepest uptrend line and hopefully a retest to try the
short side. This is shown a little closer on the daily chart.

Gold chart, December contract (GC07Z), Daily

Just like oil, the steepening uptrend lines shows the move up has gone
parabolic. A typical retracement would be a quick decline back to the 730 area
before bouncing and then continuing lower. Because the larger pattern from
October 2006 is an A-B-C bounce the entire thing will get retraced (so back
below 600) before the gold correction finishes sometime next year.

Results of today's economic reports and tomorrow's reports include the
following:

It will be very quiet tomorrow--only the jobless claims data. The market will be
much more focused on some earnings news and news from overseas (ECB interest
rates, the US dollar, what the Chinese say, etc.). It's getting to the point
where we can expect a large gap to start the day but we just don't know which
direction. By the way, a lot of volatility, as we've been seeing the past
several month, near the highs is very often a topping pattern. It's been another
warning sign for the
bulls. Whether that continues for another couple of months
is the question but it remains a topping pattern.

SPX chart, Weekly

Because I discussed the possibility for a choppy rise into the beginning of next
year I thought I'd show that on the weekly SPX chart (in a rising wedge ending
pattern). This possibility will only become more obvious if the bounce exceeds
the key levels I showed on the daily charts. Until that happens I believe the
market has already topped out and we're in the very early part of the next bear
market decline. The excesses of the past few years simply need to be wrung out
of the system
in order to get us back to a healthy state. It's all part of the
normal cycles (which the Fed tries to stop but only aggravates).

Cisco reported after the bell and I think many were hanging their bullish hopes
on their earnings report. They did very well, reporting a +37% increase in
profits. Sounds like a reason to sell and sell they did. CSCO had dropped from
its 34.24 high on Tuesday to close at 32.75. It then dropped after hours to
29.82. CEO John Chambers reported that he sees some "softening" in orders from
big customers. As he said, "We continue to expect US enterprise growth to be
very
lumpy." Um, will that be one lump or two?

Chambers blamed some of the softening in sales to the fact that big banks, who
are some of the biggest purchasers of IT equipment, are cutting back on capital
expenditures as they buckle down and deal with their losses. The subprime
problem contained? I hardly think so.

Equity futures took a nose dive after hours and have recovered some and there's
a lot of darkness before tomorrow morning but so far we certainly have a
negative tone in the market right now. What we need to stay aware of is the
vulnerability of the market. I've mentioned a confirmed Hindenburg Omen signal,
we're in year 7 of the decennial pattern (known for steep market corrections
which we haven't had yet), excessive bullishness in the market (measured by
things such as cash levels
in mutual funds, record high margin levels, and a
plethora of sentiment indicators) and now we can add the "Dark Days" to the
bearish mix.

This "Dark Days" phenomenon relates to the lunar calendar and was written up by
Christopher Carolan who won the MTA (Market Technician Association) Charles Dow
Award in 1998. It can be found at
this
link if you'd like to read it. Basically it calls for a steep decline today
and tomorrow followed by a sharp rebound on Friday. We got a sharp selloff today
and it leaves tomorrow to see if it completes the pattern. For those who brush
away astrological "stuff" like this, JP Morgan was quoted saying, "Millionaires
don't use astrology; Billionaire do."

I don't profess to follow a lot of astrological signs but do watch some of it to
see if it fits the picture I'm developing about the market. Today's decline, and
a continuation tomorrow, fits the wave pattern and a slew of other technical
indicators so I definitely don't scoff about this. Be careful tomorrow.

On the flip side, trying to short this market can be a bear (pun intended) as
the buy programs, with the help of short covering, can spike out most of the
shorts who then watch as the market rolls back over and heads for new lows,
without them. It can be a very frustrating market to trade. For this reason I
like to trade tops--pick a bounce and try to short it. If it takes a couple of
tries, as long as you keep your stops tight, the winner can easily recover a
couple of losses.

Stay disciplined and if you miss a move just keep reminding yourself that
another bus will come along and give you a ride. This market will always be here
and always offer up trading opportunities. You don't need to be in the market
all the time (and shouldn't be) and you need to pick and choose carefully--set
up your trade and let the market come to you. The minute you start chasing the
market is the minute you're about to get whipsawed out of your trade.

Good luck tomorrow and err on the cautious side. If we do get a steep selloff
then extra caution is required as 100-point swings in the DOW could happen in a
matter of minutes. And beware the v-bottom if the Dark Days scenario plays out.
See you next week and on the Market Monitor each day.

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In Play Updates and Reviews

by James Brown

Call Updates

Anadarko Petrol. - APC - cls: 59.10 change: -0.77 stop: 55.99

APC fared better than most during Wednesday's huge market sell-off. The stock
traded higher this morning after one analyst firm raised their price target on
APC to $75.00. Shares of APC reacted to the broker comments with a rally to
$60.95 before reversing lower. Our suggested trigger to buy calls was $60.55 so
the play is now open. However, given the market's weakness today we would
hesitate to open new bullish positions at this time. Our target is the
$64.85-65.00 range. More aggressive
traders may want to aim higher. Conservative
types might want to place their stop closer to $57.50. The P&F chart points to
an $86 target.

Today's market weakness threw a wrench in ARA's bullish pattern. The stock lost
3.5% and is poised to test short-term support near $74.00 soon. More
conservative traders might want to tighten their stops toward $73.85, which is
November's low. We're not suggesting new positions at this time. We have two
targets. Our short-term target is the $79.90-80.00 range. Our more aggressive
target is the $82.50-85.00 range.

The bullish bounce in BA is now in trouble. The stock gapped lower and dipped to
$96.11 before bouncing back only to see the rally failed near $98.00 this
afternoon. Most quote services will tell you that BA only lost 46 cents today.
However, that's incorrect. If you check historical prices BA closed at $97.70
yesterday and closed at $96.89 today, which is an 81-cent loss. We're not
suggesting new bullish positions at this time. Our target is the $104-105 zone.
More aggressive traders
could aim for the highs near $107.

Yesterday DE surged $6 and hit our first target in the $159.50-160.00 range.
Today shares of DE gave it all back with a 3.7% decline. The close under $155,
which should have been short-term support, is bearish. We're not suggesting new
positions at this time. Our second target is the $164.00-165.00 zone.

DST is another case where the stock gave back almost all of its prior day's
gains. Yesterday the stock broke out over resistance to hit new highs and
triggered our play at $87.25. Today's reversal is very discouraging. More
conservative traders will want to consider exiting early now or raising their
stop loss toward $85.00. We're not suggesting new positions at this time. Our
target is the $94.00-95.00 range.

Same story, different stock. GR broke out to new highs on Tuesday. Today GR gave
back almost all of its gains. We would wait and watch for a bounce near $71.00
or near $70.00 as a potential bullish entry point to buy calls. However, if the
broader market indices are still falling we'd avoid new bullish positions here.
Our conservative target is the $74.90-75.00 range. Our more aggressive target is
the $78.00-80.00 range. The P&F chart is bullish and points to a $99 target.

ICLR's lack of a significant sell-off during today's market-wide plummet could
be seen as a sign of relative strength. Look for a bounce near $57.00 or the
$56.00 level as a potential new entry point to buy calls. However, we'd avoid
new positions if the major indices are still falling. Our target is the
$63.50-65.00 range. We would consider this a higher-risk play for the simple
reason that volume is so low on both the stock and the options.

This is the fourth time in about a week that shares of KMT have retreated to
short-term support near $88.00. Unfortunately, the overall pattern over the last
several days is starting to look more like a short-term top. We are not
suggesting new positions and more conservative traders will want to strongly
consider just exiting early right here. Our target is the $99.00-100.00 range.
The P&F chart has a triple-top breakout buy signal with a $102 target. FYI: KMT
has a 2-for-1 stock
split set for December 19th.

LLL had hit new all-time highs on Tuesday so it was a big target for profit
taking today. We're surprised that LLL did not see more selling pressure. We
would expect a dip back toward $110 or its 10-dma near $109.00. We're not
suggesting new positions at this time. We have two targets. Our first target is
the $114.00-115.00 range. Our second, more aggressive target is the
$118.00-120.00 range. FYI: The P&F chart's bullish target has risen from $133 to
$139.

NOC out performed the broader market with only a minor loss today. Shares were
upgraded this morning and the stock spiked to $85.21 before paring its gains.
Volume was pretty high on today's session. We would look for a dip back toward
$83.00 or the $82.00 region as a potential entry point to buy calls. We're
suggesting a stop loss at $79.99 but you might be able to get away with a stop
near $80.80. Our target is the $89.00-90.00 range. The P&F chart shows a bullish
catapult pattern
with a $92 target.

Canadian oil company, PCZ, saw its shares out perform most of the market on
Wednesday with a new 52-week high. If you're looking for a new bullish entry
point we'd watch for a dip back toward the $59.00 or $58.00 levels. Our target
is the $64.50-65.00 range.

The NASDAQ suffered a big one-day loss with a 76-point decline (2.7%) but the
NDX index didn't do quite as badly (-2.4%). Of course there is no way to
describe today's session as anything but bearish and the QQQQ broke down under
short-term support near $53.60-53.50. More conservative traders may want to
abandon ship right now (not a bad idea) or tighten their stops toward $53.00.
Our target is the $58.00-60.00 range.

In an amazing show of strength shares of RIMM managed to hit another new
all-time high and close up with a 1.5% gain. The stock hit an intraday high of
$137.00 as traders reacted to news that one analyst firm raised their price
target on RIMM from $120 to $180. We are not suggesting new positions at this
time and a correction back toward the 10-dma would not be out of line. Our
target is the $138.00-140.00 range. More aggressive traders could aim higher.
The P&F chart is forecasting
a $163 target.

Target achieved, actually target exceeded. SI gapped open higher at $140.23 and
hit $140.66 before succumbing to profit taking. Our initial target was the
$139.85-140.00. The stock reversed under resistance near $140.50-141.00, which
we outlined earlier. Readers can probably expect more profit taking tomorrow.
European markets will probably dive tomorrow in reaction to our weakness today.
Then as the U.S. market opens up on Thursday shares of SI will probably gap open
lower in response
to trading back home. There is the slim chance that SI will
not see a lot of profit taking based on news out today that the company has
approved a stock buy back program of up to 10 billion euros. We're not
suggesting new positions at this time. Our second, more aggressive target is the
$144.50-145.00 range. The P&F chart is bullish with a $182 target. FYI: SI
trades as an ADR here in the U.S. and will most likely gap open one way or the
other every session as the ADR adjusts
to trading in Europe.

Warning! The action in SINA has turned bearish over the last couple of sessions.
The overall trend is still bullish but the stock looks poised to breakdown.
Aggressive traders will want to consider adjusting their stop loss lower to
$52.90 if you want to give SINA the maximum amount of room to maneuver and still
not break its bullish channel higher. More conservative traders will want to
consider an early exit now or raising your stop toward $54.00. Currently we have
two targets. Our
first target is the $59.50-60.00 range. Our second, more
aggressive target is the $63.00-65.00 range. FYI: In the news today SINA
announced it will report earnings on November 14th.

We are not off to a very good start with the semiconductors. There was no follow
through on the recent bounce and shares of the SMH holders are poised to test
their recent lows. We are not suggesting new positions at this time but a bounce
near $33.30 would look like a potentially bullish double-bottom pattern and a
new entry point for calls. Readers may want to wait for a new relative high over
$34.75 before initiating positions. Our target is the $36.00-36.50 range. More
aggressive
traders could aim higher. Keep an eye on the SOX index.

STLD was not immune to the profit taking. Shares lost 3.4% albeit on below
average volume. The stock has produced an "inside day". We would wait and watch
for a bounce near $50.00 or a new move over the 10-dma near $52.60 as potential
entry points for buying calls. However, if the markets are still falling we'd
avoid new positions entirely. Our target is the $57.50-60.00 range. The P&F
chart is bullish with a $78 target.

Our aggressive play in TSL has been opened. Yesterday FSLR led a rally in the
industry and helped push TSL higher toward resistance near $65.00. We suggested
a trigger to buy calls on a breakout at $65.25. TSL hit $65.90 this morning
before reversing lower against the market's overpowering decline. This would
normally look like a bearish failed rally pattern. However, the solar stocks are
poised to rally again tomorrow. After the closing bell today FSLR reported
earnings that were
much better than expected. Shares of FSLR closed at $167 but
were trading up near $207 in after hours tonight. That sort of pop higher will
(and is) pulling shares of TSL higher. We remain bullish but this remains an
aggressive, higher-risk play. Our target is the $72.00-72.50 range near its July
highs.

After Tuesday's big bounce TSO hit some profit taking today. Shares slipped 4.2%
and painted what looks like a potentially bearish "dark cloud cover" candlestick
pattern. The trend of higher lows is still in place so readers might want to
wait for a dip and bounce near $55 as an entry point to buy calls. Our target is
the $64.00-65.00 range.

Put Updates

None

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call
and an OTM put on the same stock. The strategy is neutral. You do not care what
direction the stock moves as long as the move is big enough to make your
investment profitable.)

---

Borg Warner - BWA - cls: 100.81 change: -2.99 stop: n/a

BWA slipped almost 3% toward round-number support at the $100 level. We are not
suggesting new strangle positions. At this time we have two weeks left on
November options. The options we suggested for a strangle were the November $100
calls (BWA-KT) and the November $90 puts (BWA-WR). Our estimated cost was $4.50.
We want to sell if either option hits $7.25 or more.

ESRX continues to consolidate but could find some short-term technical support
at its 10-dma soon. We are no longer suggesting new strangle positions on ESRX.
The options we suggested for a strangle were the November $65 calls (XTQ-KM) and
the November $55 puts (XTQ-WK). Our estimated cost was $1.95. We want to sell if
either option hits $3.50 or higher.

IBM slipped lower toward support in the $111-110 zone. We do not see any changes
from our previous comments. The lack of a big move on earnings has doomed this
strangle play. Unless IBM sees some really big swings in the next couple of
weeks this is a bust. Our November strangle suggested the November $125 call
(IBM-KE) and the November $110 put (IBM-WB). Our estimated cost was $3.00. We
wanted to sell if either option hits $6.00.

MNST lost 2.3% thanks to the market's big decline. We have less than two weeks
left on the November options. We are no longer suggesting new positions. The
options we suggested for our strangle were the November $40 calls (BSQ-KH) and
the November $35 puts (BSQ-WG). Our estimated cost is $1.75. We want to sell if
either option hits $2.95 or higher.

Dropped Calls

S&P 100 Index - OEX - close: 688.73 chg: -21.18 stop: 694.99

The market indices were hammered hard today. Financials lead the way down with
the banking sector indices sliding about 6% each. Given that the financials are
such a large part of the S&P 500 and S&P 100 the OEX was unable to avoid big
losses. The OEX index closed down almost 3% and broke below what should have
been support near $695. The index hit our stop at $694.99 closing the play.

Picked on November 04 at $704.95
Change since picked: -16.22
Earnings Date 00/00/00
Average Daily Volume = million

---

Financial Sector SPDR - XLF - cls: 30.06 chg: -1.74 stop: 30.65

Oversold bounce? Where? Short-term bottom? What's that? Remember what we said
yesterday that this looks like we were trying to catch the "falling knife"?
Here's a good example of what happens when the knife keeps falling. The
financials stocks were killed today with the banking sector indices slipping
about 6% on another round of serious concerns for the credit market and subprime
exposure.

Dropped Puts

Dropped Strangles

Trader's Corner

Why the Fall?

by Leigh Stevens

Someone came over to my office today and excitedly asked about the steep
decline today and asked what was going on with the dollar. Well, it's in the
nature of the media to point to some trigger or cause, as if a steep drop at
this juncture was unexpected except for some triggering 'event'. And, of course
the dollar is going down. Given our huge trade imbalance and latest interest
rate cuts, foreigners are not so eager to hold our greenbacks. While others
wonder why the market fell off
sharply recently (isn't it 'supposed' to keep
rising!), I kind of marvel that speculators and investors kept bidding up stocks
in the face of serious dangers of a possible economic slowdown.

5 TECHNICAL FACTORS RELATING TO THE RECENT STEEP DECLINE:
(from the desk of a technical trader)

1.) Declines or corrections in the market are more often steep than gradual,
particularly in long-term bull markets. Selling tends to be more of a one-time
decision; e.g., a big fund manager sees the market stalled and decides he wants
to raise 1 percent more cash and sells a half billion dollars worth of stock.
Buying tends to occur in multiple and gradual increments on the way up. We love
to buy, hate to sell, but when we do, it tends toward panic selling in
individuals.

2.) Sales of a lot of things, appear to be slowing down, judging from the loss
of major long-term upside momentum in the stocks whose business it is to
transport all those widgets from one place to another. With oil near $100, this
is impacting those companies' earnings of course. Dow Theory is exactly about
situations where one of the two major Dow averages, (the so-called Dow
'Industrials' and the Dow Transportation average) fail to move in tandem with
the other; i.e., one Average
or the other doesn't also follow to a new closing
high or fall to a new closing low.

I wrote last month in a Trader's Corner column about the Dow Theory 'warning'
suggested by the Dow Transports (TRAN) seriously lagging the Dow 30 (INDU). Not
only was TRAN looking unlikely to join INDU anytime soon in the new Dow closing
high made in the week ending 10/12, but TRAN was also falling well under its
long-term up trendline showing a loss of momentum. My first graphic of TRAN and
INDU are their close-only weekly 'line' charts, with a Friday (weekly) close
that is still
undetermined of course; the last point on the lines are today's
closes.

Anyone, wanting more of the background on Dow Theory can backtrack to my earlier
article on the Option Investor web site by clicking
here.

3.) There was technical 'resistance' apparent at the recent highs in the major
stock indexes, if you knew what to look for. Fortunately, Option Investor.com
subscribers, that's you wise people, had some forewarning about this, also in
this space last month and in my Index Trader columns seen online on the weekend.
I'll update a couple of these weekly charts with the broad uptrend price
channels that I constructed. Step by step instructions for constructing trend
channels can be reviewed
by going back to my 10/24 Trader's Corner by clicking
here.

The S&P 500 (SPX) weekly chart seen next below provides my first example of how
a line drawn parallel to a major up trendline and touching 1-2 or more prior
tops, can intersect much later at an area that brings in significant
selling/resistance.

Moreover, just as the Dow Industrials and Dow Transportation averages had a
bearish 'divergence' in their respective trends, there was a clearcut divergence
between the higher highs seen in SPX below and what the 13-week RSI (Relative
Strength Index) was doing. Prices were going up, while 'relative strength' was
declining. Such bearish price/indicator divergences can be another tip off not
to get 'too' bullish; although stocks looked like they could 'only' go up, there
were these technical
warnings.

A second broad weekly uptrend channel is outlined on the Nasdaq Composite (COMP)
chart seen next. Looking at the 13-week RSI shown under the price chart, the
feature here wasn't a question of a bearish DIVERGENCE between price action and
the indicator at the recent high, but 'resistance' implied by an 'overbought'
reading (in the 67-70 zone) associated with past tradable tops. The combination
of the rise to resistance implied by the top end of the uptrend channel AND the
overbought
reading was a double tip off that COMP had reached an area of
significant resistance.

4.) Technical warnings of a possible downside correction in the Nasdaq were also
suggested by the 'rising wedge' chart patterns seen in the daily charts of
Nasdaq Composite (COMP) and the Nas 100 (NDX) and pointed out in my most recent
(Saturday) Index Trader article.

The pattern in the two key Nasdaq indices, one of which is seen below (Nas 100,
NDX), is that of a bearish rising 'wedge'; i.e., an upward trend bounded by two
intersecting, up-sloping, trendlines. This pattern sometimes points to a bearish
short-term (up to 3 months) trend reversal, with decline potential of 9-15
percent on average when such a decline occurs and prices break out of the wedge
pattern.

With stocks, the bearish wedge pattern is only so-so in predicting later trend
reversals, but this pattern has a relatively better record of prediction when
seen in the major stock indexes. I point it out here because it is considered a
bearish chart pattern, but without the strong record of prediction provided by
such patterns as a double top, double bottom, Head & Shoulder's top, etc.

The pie shaped pattern made by extending the lower and upper trendlines out to a
point of intersection makes the 'wedge' part of a bearish rising wedge. It's a
somewhat unusual chart pattern not seen all that much, but in about half the
instances I've seen of the rising wedge in the major indexes, it's led to a
steep correction after there's a decisive downside penetration of the lower
trendline. Whether NDX has as much downside potential in coming weeks as to fall
back to the 2038
area (a 9% correction) or lower, remains to be seen. Stay tuned
on that!

As was seen with an earlier chart example, prices were rising while NDX's 13-day
Relative Strength Index (RSI) seen above was declining, a technical divergence
suggesting that the index could be in a for a sharp price break at some point;
'SOME' is the operative word here, as just when such a fall will occur has to be
watched closely for.

Big cap tech stocks have been very strong and a bullish view prevails. There's a
bearish warning provided by the foregoing chart and indicator patterns. Even the
best performing stock groups cannot usually resist an overall market decline.

5.) Clear and present danger of an upcoming trend reversal occurs when traders
get overly bullish (danger of a downside reversal) or overly bearish (increasing
likelihood of an upside reversal). The question is how do you measure such
bullish or bearish 'sentiment' and as anyone who follows my particular way of
doing that will be familiar with the indicator shown at bottom of my last chart
below, that of the S&P 100 (OEX):

The last peak reading noted at the red down arrows above indicated an extreme in
bullishness; readings at and above the upper (level red) line, are considered to
represent an 'overbought' extreme and suggests a possible downside trend
reversal within 1-5 trading days. This last peak in bullish sentiment occurred 1
day before this latest steep correction began. Once such corrections begin, they
are usually intermediate-term in duration; e.g., of a 2-3 week or more duration
rather than
short-term of 2-3 days duration.

The peak indicator reading (at the upper red line) PRIOR to this most recent
one, preceded the top made at 735 in OEX by exactly five days.

NOTE: The 'CPRATIO' line seen above is the result (a ratio) of dividing total
daily CBOE equities call volume by total daily equities put volume. I calculate
the number daily from the CBOE web site figures for equity options call and put
volume. I used to just keep a simple written record of the daily call to put
volume number, before I could graph this 'custom' indicator in my TradeStation
software. 1.9-2 and above, marks an overbought/overly bullish extreme in the
bullish/bearish
sentiment spectrum. 1.1 or below is an extreme in bearish
sentiment or the outlook for stock prices as reflected in the collective
decisions of a lot of option traders.

GOOD TRADING SUCCESS!

Today's Newsletter Notes: Market Wrap by Keene H. Little, Trader's Corner by
Leigh Stevens, and all other plays and content by the Option Investor staff.

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